Felix Salmon gets it right about short-selling this time round, at Seeking Alpha: (December 31):

“It’s not just short-sellers, either: most financial professionals are essentially parasitical on people who genuinely add value in the real world. Old-fashioned lending is important, and I’d say that stock markets in general also count as a positive financial innovation, since they make it vastly easier for companies to raise equity capital. But in my ideal world, people working for real companies like Kodak would make more money, in general, than people working for more parasitical financial-services companies. The fact that it’s the other way around worries me. While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.”

Note: This Salmon post contrasts sharply with his earlier opinion of short-selling as fine and dandy all the time.

Now, take a look at comments I made in response to readers on a December 28 blog post, Lazard Freres Insider Trading Bust:

Lila: “I see it as a battle between technocrats/bureaucrats (money managers after all are only managers) versus value producers, or capitalists..

Money management has to be subsidiary to value producing because money is only an exchange, whereas value preexists and underlies the exchange.”

and also

Lila: “The whole short term bias has had a very negative impact. Always looking for an inside edge in a very aggressive, heck-with- the-rules, greed-is-good type of way contributes to that.

People who don´t get this are being blinded by language and what I like to call market fundamentalism. The market is not a nature god or the law of the jungle

It´s a set of interactions that presupposes some ethical basis and behavior..some rule-following.

Banking and money management are professions NOT businesses..they have professional and ethical codes.

Actually businesses should be able to trust them in the same way doctors or accountants used to be trusted.
Instead we have businessmen (the anti-nss crowd) teaching professional ethics to the professionals (bankers and managers).

I´m afraid the ideology of short-term speculation has brainwashed a whole lot of people on this.”

To return to Salmon´s post.

At last, someone in the financial industry sees past the local ideology and recognizes that language about “long” and “short” cannot be taken mathematically. Long and short are as different as climbing up a mountain and falling off one…..or building a skyscraper and blowing it up…..

Fooled by randomness? Yes. But we´re fooled a lot more by language.

Please note that Salmon is talking about short-selling, not naked short selling (NSS). Everyone agrees that NSS is illegal. How bad it is and how extensive are what´s being debated.

Salmon, however, is arguing (correctly) that speculation itself, while necessary, is simply not as important or valuable in the market when it goes beyond a certain proportion of market activity (which is just what tin-foil hat, “crazy” Patrick Byrne has been saying..but darn, run your business in the US today or run your mouth, don´t do both, because guys making money off killing businesses don´t lose their first-amendment rights, only the guys building them do).

So yes, Mr. Salmon, a big round of applause for getting precisely what´s meant by the term financialization, which everyone from Kevin Phillips to Karl Marx has criticized.

On Wall Street, however, the shine of big piles of moolah, I´m guessing, blinds even the fairly quick-witted (which is what passes for smart there) from figuring out that short-sellers don´t grow companies or economies or jobs.

That´s what value-producing capitalists do.

Speculators shouldn´t be demonized. That´s wrong. Both longs and shorts provide liquidity, and shorts also correct excessive valuations. Both functions are vital to the capital markets. But a medicine that´s good in small doses becomes a poison in large ones. You can´t pop pills or potions in the same way you eat nutritious food.

The faux capitalist money-shufflers (bankers and fund managers) and their in-house shills (the state capitalists who play footsie with them from inside Treasury and the Fed Reserve and the DTCC and the NYSE and the State Dept. and the Ex-Im Bank and everywhere else) get the adulation, but what they do is simply derivative of real productive activity. It´s secondary.

So now we´re just getting our eyes opened to what happens when primary, fundamental value-producing stuff declines in favor of value-identifying derivative stuff.

It´s like a school building filled with administrators…. and no teachers…and pretty soon, no students.

Which is where Byrne´s school-voucher initiative fits in philosophically (whatever your opinion of it from a practical or political point of view).

NB: I don’t support federal government subsidies of education. The state is a different matter. But even here, since I generally don’t have a high opinion of formal schooling, I can hardly be expected to be in favor of paying people money to do it one way or other.

All this is pretty obvious to anyone who hasn´t been indoctrinated in the shibboleths of professional money managers, people who have just enough knowledge and market experience to get a hearing on the subject, but not enough to stand back and evaluate their own modes of analysis.

A little knowledge is a dangerous thing…

(Note: There are several things on which I disagree with Salmon, even in this Seeking Alpha post, but on New Year´s Day, still suffused with the buzz of several hours of merry-making, I´m inclined to take the broad view and let them slide for now..)

Update: This doesn’t mean I advocate more regulation or taxes on speculative activity. I think the problems we’ve had arise from government intervention – specifically, from cheap money creation. So getting the government out of pegging interest rates lower than they should be would be a start at cutting back the expansion of the financial industry. As for regulating hedge-funds, since the regulators have proved incapable of regulating the stock market, it’s hopeless to imagine they’ll do better with the hedge-funds. Besides which, where does the money come from to do that? We already have laws that can be applied to criminal activity. Apply those first. Expose fraud and malfeasance. Then drain money out of the financial industry. …which is something ordinary people can do by taking money out of the big banks, shorting financials, going to barter, gold, and land as alternative investments.